Market Turning Points

Precision timing
for all time frames through a multi-dimensional approach to
forecasting
using technical analysis: Cycles - Breadth - P&F and Fibonacci price projections
supplemented by Elliott Wave analysis

"By the Law of Periodical Repetition, everything which has
happened once must happen again, and again, and again -- and not capriciously,
but at regular periods, and each thing in its own period, not another's,
and each obeying its own law... The same Nature which delights in periodical
repetition in the sky is the Nature which orders the affairs of the earth.
Let us not underrate the value of that hint." ~ Mark Twain

Current Position of the Market

SPX Long-term trend: The beginning of a lengthy correction is most
likely underway!

SPX Intermediate trend: May be in the process of forming a H&S
bull market top.

Analysis of the short-term trend is done on a daily basis with the
help of hourly charts. It is an important adjunct to the analysis of daily
and weekly charts which discuss longer market trends.

Daily
market analysis of the short term trend is reserved for subscribers. If you
would like to sign up for a FREE 4-week trial period of daily comments, please
let me know at ajg@cybertrails.com.

FIRST SUPPORT LEVEL RE-TESTED

Market Overview

Last week's summary stated: "SPX appears to have completed the first phase
of its correction on Friday by reaching a P&F phase target as well as
a strong support level. This price area also corresponded to a normal downside
projection for the H&S pattern which formed as a top. It should bring
about a rally which may be strong enough to carry it back to 2075 -- a 50%
retracement of the move down from 2111."

This is pretty much what happened last week when the index filled its base
projection of 2084, reversed, and started a correction which, by the end of
the week, brought it within four points of where the rally started. But it
does not look as if we are finished declining over the short term.

And then: "This retracement would enhance the possibility that it could
form a right shoulder of an even larger H&S top which, when broken, would
leave no doubt that we have started a major correction."

The SPX price action is becoming interesting, since I also mentioned that
we might be in the process of forming the right shoulder of a larger H&S
pattern whose neckline is at 2042, and if we do continue to decline for another
ten or twenty points, it will make this potential formation even more realistic.
Whether or not it turns out to be such a pattern (if the 2043 support level
is broken) it will increase our bearish stance -- especially if this is followed
by a move below the next support at 2020.

In fact, as we will see later, three in our group of leaders have already
broken below a level comparable to the SPX 2043, with the TRAN "canary" being
the latest by making a new low on Friday. It would be surprising if SPX and
the other two do not follow suit next week.

SPX Chart Analysis

Daily chart(This chart, and others below, are courtesy of QCharts.com.)

I have sacrificed showing the rally low (1810) in order to provide more clarity
for the top pattern which may be evolving as a H&S formation. I have drawn
the presumed neckline with a heavy red line across the two lows. The parallel
to the neckline drawn from the left shoulder is pretty much in alignment with
the neckline of the smaller H&S pattern, and its extension is where the
rally from 2040 stopped, giving the entire formation a symmetrical pattern.
However, in order to confirm it as a H&S, the index will have to plunge
below the neckline (perhaps to the bottom dashed trend line of the large rising
channel or lower), rally to the neckline, and then continue the downtrend.
If my intuition serves me right, next week could accomplish a good part of
that confirmation process.

On the P&F chart, there is enough of a count which can be derived from
the small H&S top to push prices beyond the dashed line. If recent activity
is a guide, we could very well be there by the end of next week, but this is
only if short-term cycles cooperate, reinforced by longer-term ones due to
bottom by the end of June (credit to Eric Hadik).

The reversal from 2084 has caused the three oscillators to turn down, with
the MACD ready to go negative. This will take place if we close below the "neckline",
and it would be short to intermediate-term bearish. If we cannot breach the
neckline and we start up from here, the whole idea will have to be scrapped
and a new evaluation of the market's positon determined.

The hourly chart shows that the index has been traveling in a well-defined
channel with three points on the top line and two on the bottom. On 5/06, it
stopped at 2040, on the highest of the three purple lines identifying key support
levels. That one certainly proved itself by causing a 44-point rally. But the
fact that prices have immediately retraced almost all of their previous gain
cannot be considered bullish, and it strongly suggests that the lower key levels
are about to be tested. In fact, the second level corresponds to the short-term
projection, which could complete the second phase of the decline from 2084
as early as Monday (if we show some weakness at the opening). Then, after a
bounce, we could start on the third phase of the decline (if this indeed turns
out to be a declining pattern we are making) and this could take prices all
the way to the bottom of the red channel, once again. That's a lot of assumptions,
but not illogical.

Like the daily oscillators, the hourly are also in a declining mode, except
that the A/Ds (raw data) does not show all that much weakness, which is probably
due to the commodity stocks still bouncing from their oversold conditions.
When they turn down again, the A/D figure should return to normal.

The prospects for SPX to break its first support level are increasing. Two
leading indices: SMH (semiconductors) and QQQ (tech stocks) already made a
decisive penetration of their April lows, and last Friday, TRAN made it three.
With SPX having created a congestion pattern which has short and intermediate
counts which can drive it well past the 2043 support (and pivot) level, it
should only be a matter of time before SPX sides with the majority. The remaining
two indexes of our leaders' sample also seem poised to join the rest.

A coordinated move below that important support level would have a bearish
connotation, especially since it would imply that the SPX - and perhaps IWM
- are forming large H&S patterns.

UUP appears to be intent on reversing its short term, and perhaps intermediate,
trend. Since meeting its downside consolidation target (which coincided with
the bottom of a shorter trend channel), the index has had a good rebound which
has already broken out of a three-month downtrend and looks ready to challenge
the larger channel's top line. Everything considered, it may be more a matter
of "when" than of "if"! As the dollar begins to regain some strength, it will
have an effect not only on commodities, but on a stock market which has been
buoyed by commodities-related stocks having an oversold rebound. This has been
especially obvious in the performance of the A/D line which has far exceeded
price performance. Should this trend be reversed by a stronger dollar, it would
bring additional pressure on a market trend which is currently looking tentative,
at best.

A rising dollar would also undermine gold's effort to recover from a prolonged
correction. The chart of GLD is showing an index which is struggling to extend
its uptrend. It is crawling along an uptrend line which has already been tested
four times over the past six weeks. But I am beginning to question my thinking
that the 25-wk cycle low - which should be due any day - will help the index
break through its trend line and cause some temporary weakness. It's possible
that this cycle, once very dominant, has faded in intensity over time and that
it may even have made its low last week without being able to break through
the trend line. If that's the case, GLD would then be able to reach at least
125-126 before reversing. Anyway, we don't have to speculate too much about
this since GLD's near-term future is likely to be decided by next week.

Last week, USO again tried, although unconvincingly so far, to push through
its upper channel line. In its favor, it has the potential to rise to 12 before
it stops trying. If it did, it would encounter the 200-dma as well as the top
of its channel line, which would cap the move for now. As stated earlier, USO
may not be in a position to attempt a more protracted uptrend until it has
built a larger base. That would require more range-bound trading between its
recent low and the current price over a period of time!

Summary

SPX may be on the verge of proving the bears' viewpoint correct. By continuing
its current decline decisively below 2043, the index would not only join other
leading indices in breaking a significant support level, but also further confirm
that, since the end of March, it has been in the process of creating a bull
market top in the form of an important H&S pattern. Should this prove to
be the case, it would project a serious decline over the next few months.

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The above comments and those made in the daily updates and the
Market Summary about the financial markets are based purely on what I consider
to be sound technical analysis principles. They represent my own opinion and
are not meant to be construed as trading or investment advice, but are offered
as an analytical point f view which might be of interest to those who follow
stock market cycles and technical analysis.

The above comments about the financial markets are based purely on what I
consider to be sound technical analysis principles uncompromised by fundamental
considerations. They represent my own opinion and are not meant to be construed
as trading or investment advice, but are offered as an analytical point of
view which might be of interest to those who follow stock market cycles and
technical analysis.